Recovered history: The forerunner of the current banking & housing scandal

The comparison of criminal referrals during the 1990s S&L crisis and during the current banking scandal, astounding as it is, misses one point: the government didn’t go anywhere close to properly prosecuting individuals and firms in the S&L crisis and, in failing to do so, helped to lay the groundwork for today’s disaster. Below are excerpts from an awarding winning Progressive Review article written in 1994 that helps to explain what happened:

Sam Smith, 1994 - In the early days of the savings and loan crisis the joke was that in Texas if you bought a toaster oven they gave you a free S&L. It turns out not to have been much of a joke. The Resolution Trust Corporation — the government’s misnamed S&L caretaker that is neither producing a resolution nor inspiring trust — is engaged in a massive giveaway that may make Teapot Dome look like a demitasse cup.

The RTC is already the nation’s largest operator of financial institutions and, according to the New York Times, “quickly becoming the biggest financial institution in the world, the largest single owner of real estate, the largest liquidation company and the largest auction firm.” This ungainly monster of America’s late empire period was established without meaningful public debate nor with any serious consideration of alternatives.

But official Washington is not alone in its odd indifference to the nature of the S&L solution. The media –even the op-ed pages and Sunday feature sections — have largely ignored the question. The topic was not listed on the agenda of The Other Economic Summit — the progressive alternative to the meeting of economic ministers — even though TOES gathered this year at virtual ground zero of the crisis: Houston, Texas. And Ralph Nader’s major concern seems to be which group of taxpayers will bear the fiscal burden of the scandal.

Cost estimates continue to soar — as high as $500 billion if you believe congressional analysts or $1.4 trillion (that’s right between the GNP of West Germany and Japan, folks) if you accept the calculation of a knowledgeable Wall Street Journal correspondent. But the press, the politicians and even the public interest groups seem far more concerned about how the crisis came about than what we are going to do about it.

One has to admit the former matter is enthralling and appalling. Put rather neatly by one former FBI fraud specialist to the Village Voice, the S&L crisis is perhaps the largest criminal conspiracy ever created. The FBI currently has some 8000 cases of S&L fraud before it, 1300 of them gathering dust for lack of funds to pursue them. Another 13,000 tips haven’t even been followed up, according the Newsweek. According to Rep. John Conyers, to date the government has recovered less than 2% of the money lost through criminal fraud in thrift cases, even though fraud was involved in at least three-quarters of S&L insolvencies.

The sum of money involved is staggering. Newsweek estimates that even at a conservative $250 billion cost, this is an amount that would pay for existing education programs for the next four years; or nearly pay for universal health insurance and long-term care for the next four years; or overhaul the nation’s water systems, repair all bridges and have money left over to start fixing highways. There are currently some 40,000 law suits over all this money and the figure is expected to double by year’s end.

But recounting neither the sum nor the sin involved leads to a solution. After all, the broad outline of the S&L scandal have been known for some time yet in its wake the president and the Congress have fashioned an extraordinarily shoddy, dangerous, expensive and corrupt jury rig to correct the matter.

Not only is the government failing to solve the problem, it is creating massive new scandals, inequities and public deficits. Not the least of these is the likelihood that the major beneficiaries of the S&L bailout will be the very states responsible for it. An S&L in stodgy Wisconsin, for example, ran an ad boasting, “We dare to be dull.” But that will not protect the people of Wisconsin from having to cough up an estimated $592 apiece to bailout such states as Texas where Cleveland State University professor Edward W. Hill estimates the per capita benefit of the bailout will be $4,775.

Among the other clear beneficiaries of the bailout are the quick-rich financiers who, with their soul brothers, helped to create the scandal. Small business and ordinary citizens are not invited to the RTC’s extraordinary fire sales. You can’t get a catalog and order by mail. Yet The New York Times reported on July 3 that RTC owns 35,908 properties and “though no specific list has been released, the agency’s holdings include coal and uranium mines, ranches and pasture lands, 162 golf courses, oil fields, marinas and boat yards, athletic clubs, garages, parking lots and mobile home parks. 84% of the total inventory is residential — mainly in Texas.” Public Citizen notes that the assets include “a buffalo sperm bank, a Nevada bordello, a windmill farm, a share of the Dallas Cowboys, [and] an entire town in Florida.”

Billions of dollars worth of assets are being traded at prices that challenge even Crazy Eddie’s Emporium in the midst of a recession Memorial Day weekend, — but for the benefit only a handful of huge corporations and redundantly wealthy financial hustlers. The overhead for these sales is on us.

Playing with matches

We know — or should know by now — that the crisis was created in no small part by the gluttony and stupidity of advocates of the so-called free market running rampant through America’s fiscal countryside. What you may not realize is how far the government’s acquiescence went. For example, until the deregulation of the 1980s, S&Ls had to have at least 400 shareholders. By 1981, the government had made it possible for there to be only one shareholder and that shareholder didn’t have to have any hard equity in the institution. It was also possible for a S&L to have only one borrower. Further, Congress raised the limit of federal insurance from $40,000 to $100,000 — and that per account rather than per individual depositor. As Rep. Charles Schumer put it, “The government behaved like a fire insurance company that said to its customers, go ahead, play with matches. We’ll cover you if anything goes wrong.”

Although some Democrats are smugly blaming the Republicans for the S&L disaster, the truth is that this bill passed the House 380 to 13 and by a voice vote in the Senate. In another spate of misdirected bi-partisanship, Senator Jake Garn and Rep. Ferdinand St. Germain introduced successful legislation which allowed S&Ls to get into such new activities as junk bonds, unsecured commercial loans and major real estate projects.

Thanks to recent revelations we now have a better idea of why Congress didn’t look after our interests more assiduously. As just one small example, one study has found that S&Ls gave $45 million to congressional candidates during the past three elections, including more than $1 million to members of current congressional banking committees. The aforementioned St. Germain, according to the newsletter PACs and Lobbies, received nearly $150,000 in campaign contributions, over a six year period. In contrast, S&L and HUD prober Henry Gonzalez received only $1750 during the same time.

Such facts blast huge holes in arguments that S&Ls were largely victims of changing world economics, regional recessions and other macro-economic rationalizations. They were, in fact, victims of the avarice of their owners, licensed in their greed by the United States Congress and the executive branch. And the media hardly said a mumblin’ word.

It is this same cast of characters that have given us — or are overseeing — the so-called S&L bailout. The same hidden agendas, the same fiscal fast shuffles, the same class of beneficiaries, the same lack of media concern for the import of public actions.

Behind the public drama of the S&L solution is the most egregious example to date of no-fault capitalism and lemon socialism. The former is the remarkable principle that — notwithstanding all the fawning over the “free market economy” — our largest business institutions are philosophically, fiscally and criminally exempt from the ultimate consequences of laisse faire. The latter is the equally inconsistent principle that to maintain the free market the government is responsible for anything out of which private enterprise can’t make a profit. It may not, however, help support this magnificent non sequitur through activities that might actually provide income for the government.

No, the rules of the game are that a major industry is allowed to make whatever mistakes it wishes in pursuit of the holy grail of free enterprise, the costs of which to be fully borne by the taxpayer.

Further, the S&L solution has the hidden goal of moving America towards increasing financial oligopoly. The government is prepared to guide, assist, regulate and tax to accomplish this goal. This sort of economic policy has been seen before in fully developed form and it has a name: fascism, described by Mussolini biographer Adrian Lyttelton as “the product of the transition from the market capitalism of the independent producer to the organized capitalism of the oligopoly.” As Italian fascist economic theorist Alfredo Rocco put it, such an economy “is organized by the producers themselves, under the supreme direction and control of the state.”

The media: unskilled and inattentive

What has taken place certainly involves fraud, malfeasance, misfeasance and nonfeasance. But beyond that, what we are experiencing approaches a fiscal coup. Using the not unreasonable cost estimate of $500 billion we are talking about a sum the size of the combined 1986 assets of General Motors, Exxon, Ford, IBM, Mobil, General Electric, ATT, Texaco, Dupont, Chevron, Chrysler Philip Morris and Amoco.

Our last line of defense — the media — has been absorbed in the human interest and fraud aspects of the crisis, but woefully unskilled in reporting what is really going on. Reading separate stories about an RTC deal is unnerving. In one S&L case, The New York Times listed an institution’s assets at $1.8 billion, while the Washington Post pegged them at $3.3 billion. Deposits were $2.1 billion in the Times and $5.2 billion in the Post. Remember now, we are talking billions.

In another story, the Times put the government’s annual assistance to an S&L deal at $250 million; the Post called it $250 thousand. The same Post story made it seem the new purchaser had put up $60 million of his own money (of a promised $70 million); the Times explained that the figure was only $1000. The rest was borrowed.

These examples are not cited to nit-pick but to point out that not even journalists and copy editors can keep the scale of this scandal in perspective.

More significantly, important S&L stories are relegated to the business pages despite their enormous effect on every American. As a result many readers may have missed, for example, a February 3, 1989, financial page story in the Washington Post. The story, just as the government started rushing pell-mell to dump S&Ls, began:

“The head of the General Accounting Office yesterday criticized the government’s year-end fire sale of 200 failing savings and loans, saying taxpayers would have paid less in the long run if the S&Ls had been turned over to the government or closed. The Federal Home Loan Bank Board, which oversees and regulates the thrift industry should have held onto the S&Ls rather than promising an estimated $60 billion in tax breaks to the investors who agreed to buy the ailing institutions.”

The wrong questions

On the other hand, the questions the media have asked often miss the mark. Because these questions are frequently planted by “official sources,” however, they do reveal some of the hidden agenda behind the bailout. Here is an exquisite example from the Times in a recent weekend roundup of the news:

“Does the nation need a specialized industry to finance housing when it now has an efficient mortgage market? Does the nation need 13,000 independent banks and 3000 independent thrifts, or should institutions be allowed to consolidate across state lines, which would also enable them to spread their risks by diversifying their sources of loans and deposits? Most important is it time to consider changing the system for insuring deposits so that there is less of an incentive to gamble with taxpayer’s money?”

The clue to the source of such queries is the phrase “efficient mortgage market,” one of those delightful terms of art used by economists and financiers which would never be used by the average homeowner or wistful would-be purchaser. The latter would be more incline to favor words like “gouging.”

In fact, the mortgage market is efficient only to the extent that it has made some people and some institutions a lot of money. It has also developed in such a way that the average age at which someone can afford their first home is rising rapidly, people are paying an exorbitant percentage of their income to finance their homes, and the former stability of the home mortgage has been increasingly replaced by such economic Russian roulette techniques as variable rate mortgages.

Contrary to the image being created by the media, the banking industry and its political toadies, the need for institutions to carry out the historic functions of a savings and loan is enormous and there is absolutely no way a headlong rush towards further oligopoly in the financial world is going to help meet that need.

Yet in the June 9 Washington Post an editorial stated flatly: “It’s time, first of all, to abolish S&Ls.” The chair of the Council of Mutual Savings Institutions, which represents the over half of all S&Ls that are mutually owned and locally managed and which have generally avoided scandal and bankruptcy, noted in a letter to the Post that it was the capital stock, publicly-owned institutions that were in trouble and added, without too much exaggeration:

“Mutual savings institutions have made this a nation of homeowners. They are the nation’s primary home mortgage lenders. Commercial banks enter the home mortgage market only when interest rates are high; thrifts are in this market through all economic cycles.”

But not if the Washington Post has its way.

The story of a century

In the first decade of this century, in the wake of the San Francisco earthquake, as other bankers helplessly watched their money disappear in fire and rubble, Amadeo Peter Giannini of the Bank of Italy walked 18 miles from his home to the bank where he retrieved some $80,000 in gold and silver from the vaults, loaded it on a wagon and made his way to his brother’s house in the hills. There he opened for business, loaning the money to San Franciscans so they could rebuild their homes and businesses. He gambled that his action would encourage others to deposit funds they had been hoarding so he could loan still more. It worked and on this shaky foundation there arose the Bank of America, later to become the largest banking house in the world.

In the last decade of this century, in the wake of another great disaster, America has reversed the parable. The money of the taxpayers, needed for their homes and businesses, is being loaded on the wagons of the state for deposit in the vaults of those few who have the means, the political power and the gall to profit from the rubble of the fiscal crisis that has struck the S&L industry.

And America, its politicians, its captains of industry, its media, can think of little else to do about it except tacitly sanction the continued looting in the wake of the great capitalist riot of the 1980s.